II. Main Developments in Exchange Rates and Exchange Arrangements
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1981
This section reports on major developments in members’ exchange rates and exchange arrangements as notified to the Fund in accordance with members’ obligations under Article IV, Section 1, of the Articles of Agreement. Developments in respect of multiple market arrangements and official measures resulting in different buying or selling rates are summarized in a separate section on multiple currency practices.
There were no major changes in the institutional arrangements of or participation in the EMS during 1980 and early 1981. The United Kingdom, although formally a member of the EMS, did not elect to participate in the exchange rate and intervention mechanism, and Italy continued to avail itself of the option to maintain, on a temporary basis, wider fluctuation margins of 6 per cent. As a transitional arrangement, following the discontinuation of the one-for-one link between the Irish pound and the pound sterling, Ireland operated a mini-band within the main EMS band. The mini-band was progressively widened in stages from initially 0.5 per cent until it reached the standard EMS band of 4.5 per cent (corresponding to fluctuation margins of 2.25 per cent) on June 13, 1980. Thereafter, the rate for the Irish pound within the EMS band was determined by the market. Greece, which became a member of the European Community (EC)5 on January 1, 1981 (see Section IV, below), did not, for the time being, participate in the exchange rate and intervention mechanism of the EMS. However, the Treaty of Accession provides that the drachma will be included in the basket of currencies comprising the European Currency Unit (ECU) during any revision of it which may be made before December 31, 1985. If no such revision takes place, December 31, 1985 is set as the latest date of the drachma’s inclusion. In December 1980 the heads of state and government of the EC countries (the European Council) decided that the establishment of the European Monetary Fund (EMF), originally scheduled for no later than March 1981, should be postponed until an appropriate time and that, meanwhile, work should continue on the second, institutional stage of the EMS and on the gradual development of the use of the ECU. In this connection, it was decided to extend the interim arrangements of the EMS in their present form for a period of two years. Thus, the EC Council of Finance Ministers agreed to extend the Medium-Term Financial Assistance for two years from December 31, 1980, and the EC central bank governors decided to extend the present swap arrangements for a two-year period beyond the original expiration date of March 13, 1981. With effect from March 23, 1981 Italy devalued the lira by 6 per cent against the other currencies participating in the EMS. No other exchange rate adjustments were made during the period under review, but the system became subject to occasional strain and changes occurred in the relative positions of the participating currencies. The Belgian franc breached its divergence threshold several times in February-March 1980 and again in February-March 1981, necessitating intervention and tighter monetary measures.6 In late 1980 and early 1981, the deutsche mark began to ease against other EMS currencies, eventually to the extent of occasionally replacing the Belgian franc at the bottom of the band; from time to time, support for the deutsche mark was required against the French franc and the Netherlands guilder, which for certain periods were the strongest currencies in the system. In respect of credit mechanisms within the EMS, there was moderate resort to the Very Short-Term Financing Facility (VSTF) in order to support certain currencies—mainly the Belgian franc and, to a lesser extent, the deutsche mark.
In the period under review, the U.S. dollar appreciated considerably against the EMS currencies and the Swiss franc but depreciated against the pound sterling and the Japanese yen. The U.S. dollar’s performance was influenced to a large degree by the strengthening of the current account, and by interest rate movements. Following an initial strengthening due to rapidly rising domestic interest rates and the announcement of an anti-inflation program in March 1980, the U.S. dollar eased as interest rates on U.S. dollar-denominated assets fell sharply in April 1980. When interest rates on such assets began to rise again around mid-1980, the U.S. dollar resumed its firming against most major currencies, with the exception of the pound sterling and the Japanese yen. In nominal end-of-year terms, the EMS currencies and the Swiss franc depreciated against the U.S. dollar by between 10.5 per cent and 13.6 per cent during 1980, while the pound sterling and the Japanese yen appreciated by 7.2 per cent and 18.1 per cent, respectively. In the first quarter of 1981, the U.S. dollar appreciated against all the afore-mentioned currencies by between 4.0 per cent (against the Japanese yen) and 13.3 per cent (against the Italian lira).
As in 1978, but in contrast to 1979, there were sizable movements in the effective exchange rates 7 of most of the currencies of the industrial countries in 1980. In effective end-of-year terms, the largest appreciations in 1980 were recorded for the Japanese yen, the pound sterling, and the Australian dollar, which rose by 23.2 per cent, 12.0 per cent, and 9.8 per cent, respectively. The U.S. dollar gained 2.0 per cent in effective terms, while the Canadian dollar, the Norwegian krone, and the Swedish krona eased by between 1.1 per cent and 2.4 per cent. On the other hand, the EMS currencies, the Austrian schilling, and the Swiss franc depreciated by between 4.5 per cent and 9.5 per cent. During the first quarter of 1981, changes in effective rates included a strong appreciation of the U.S. dollar by 5.3 per cent and depreciations of the deutsche mark (1.0 per cent), the French franc (3.6 per cent), the Japanese yen (0.3 per cent), the pound sterling (0.7 per cent), and the Swiss franc (3.1 per cent).
During the period under review, six members notified changes in exchange arrangements involving reclassification under the Fund’s classification scheme for exchange arrangements (Table 1). In addition, initial notifications were received from the People’s Republic of China and from Zimbabwe. The general trend of the notifications was away from single currency pegs and toward individualized basket pegs.
|Currency Pegged to||Exchange Rate Adjusted According to a Set of Indicators|
|U.S. dollar||French franc||Other currency||SDR||Other currency composite||Cooperative Exchange Arrangements||Other Arrangements|
Central African Rep.
Germany, Fed. Rep. of
São Tomé and Principe
|China, People’s Rep. of|
Papua New Guinea
Lao People’s Dem. Rep.
Libyan Arab Jamahiriya
United Arab Emirates7
St. Vincent and the Grenadines9
Syrian Arab Rep.
Trinidad and Tobago
Yemen Arab Rep.
|Yemen, People’s Dem. Rep. of|
Iran decided in May 1980 to peg the rial directly to the SDR and determine the exchange rates of individual currencies daily on the basis of the SDR-rial peg and the rates for each currency in terms of the SDR as declared by the Fund. Previously, the Iranian rial had also been pegged to the SDR, but its exchange rate had been maintained within a target zone above and below the fixed central rate; these target zones were based on the relative purchasing power of the rial vis-à-vis that of the currencies of Iran’s major trading partners and other basic underlying economic conditions.
Three members announced exchange arrangements involving a peg to a currency composite other than the SDR. Botswana, which previously pegged its currency to the U.S. dollar, began in June 1980 to peg the pula to a basket of currencies consisting of the South African rand and the SDR. In August 1980 the People’s Republic of China notified the Fund that the exchange rate of its currency, the renminbi, is determined on the basis of the value of a basket of internationally traded currencies, weighted with reference to their importance in China’s external transactions and trends in their relative values. Exchange rates are calculated for a number of specified currencies on a daily basis, and new rates are published whenever the calculated rate deviates from the previously published rate by ½ per cent for the currencies used frequently in China’s external transactions or by 1 per cent for other currencies. Zimbabwe notified the Fund in October 1980 that the Zimbabwe dollar was linked to a basket of currencies weighted according to the currencies used in settlements. The currency weights in the basket are reviewed from time to time as settlement patterns emerge.
In August 1980 Peru joined the group of member countries adjusting their exchange rates according to a set of indicators. It discontinued the practice of advance announcement of the exchange rate of the sol in terms of the U.S. dollar and adopted a system under which the sol is depreciated frequently in line with relative price movements between Peru and its major trading partners.
The particular features of the new exchange arrangements announced by the remaining three members led to their reclassification in the residual category “Other”. Costa Rica informed the Fund in December that the dual exchange market established in September 1980 had been unified and that, as a temporary exchange arrangement, the colón had been allowed to float. All transactions, with the exception of external debt service payments of the Central Government, certain other previously approved private current invisibles, and other central government payments abroad, would be negotiated at the free market rate; until the end of 1981, exempted payments would be made at the previous official selling rate.8 In February 1980 Korea ceased to peg the won to the U.S. dollar and began to determine the exchange rate of the won on the basis of a currency basket composed of the SDR and a trade-weighted composite of currencies representing Korea’s main trading partners. However, other factors would also be taken into account, if necessary, in establishing the rate of the won. Finally, Morocco adopted a flexible exchange arrangement beginning in September 1980. At that time, the authorities also changed the composition and weights of the currencies included in the basket used to determine the exchange rate of the dirham to reflect both the trade pattern and the currencies used in settlement.
At the end of March 1981, the currencies of 58 members were pegged to one currency (40 to the U.S. dollar, 14 to the French franc, 2 to the South African rand, and 1 each to the pound sterling and the Spanish peseta). Fifteen currencies were pegged to the SDR and another 22 to other currency composites. With respect to the other members, 4 were adjusting their exchange rate according to a set of indicators, 8 were maintaining cooperative exchange arrangements within the EMS, and 33 were maintaining other exchange arrangements9 (Table 1).
Numerous modifications of exchange arrangements which did not entail a change in the Fund’s classification of the arrangements concerned were also notified to the Fund during the period under review. Such modifications can be broadly grouped into discrete adjustments in the exchange value of pegged currencies, changes in the mode or pace of change of preannounced exchange rates, adjustments of currency baskets determining the exchange value of currencies (without necessarily involving a change in the level of the peg), adjustments of margins around the peg, the choice of a different intervention currency, the introduction of new currencies, and changes in the institutional arrangements for determining exchange rates.
A large number of members lowered the external value of their currency. While in most instances devaluations were sizable and reflected the need to correct appreciations in real terms that had taken place over a number of years, some countries devalued their currencies more frequently without, however, being guided by an explicit set of indicators. This included a small number of countries which preannounced their exchange rates so as to reduce uncertainty and to affect inflationary expectations. Bangladesh devalued the middle rate of the taka in terms of the pound sterling, the intervention currency, on three occasions in July and October (twice) 1980 by a cumulative total of 10.8 per cent. In February and March 1981, however, the taka’s middle rate in terms of the pound sterling was adjusted twice, resulting in an appreciation of 3.6 per cent vis-à-vis that currency but a depreciation in terms of the SDR and the U.S. dollar of 1.3 percent and 3.5 per cent, respectively. In June 1980 Equatorial Guinea devalued its currency by 50 per cent against the Spanish peseta, to which it is pegged. Kenya, whose currency is pegged to the SDR, reduced the value of the shilling against the SDR by 4.8 per cent in February 1981. In January 1980 Korea devalued the won by 16.6 per cent against the U.S. dollar, to which the won was pegged before the adoption of an individualized basket in February 1980. Also in January 1980 the Lao People’s Democratic Republic changed the official exchange rate for the kip from KN 4 per US$1 to KN 10 per US$1. At the start of 1981 Romania implemented a set of measures which amounted to a devaluation, on average, of the leu for trade and trade-related transactions. While the nominal exchange rate for such transactions was revalued from lei 18 per US$1 to lei 15 per US$1, the system of equalization payments which were designed to make the leu value of all exports and the leu cost of some imports equal to the domestic leu value of the goods concerned was terminated.10 The Solomon Islands informed the Fund that in March 1981 the exchange value of the Solomon Islands dollar was reduced by about 6 per cent in terms of its intervention currency, the Australian dollar, to SI$1 = $A 1; this change brought the exchange value of the Solomon Islands dollar back to the level prevailing before the May 1979 revaluation. In January 1980 Turkey devalued the lira by 33 per cent in terms of the U.S. dollar for most transactions while establishing a preferential exchange rate for imports of fertilizer and insecticides as well as for inputs for their domestic production (see Section III.5, below). During the remainder of 1980, the Turkish lira was devalued seven more times vis-à-vis the U.S. dollar for a total depreciation of the basic rate of 60.8 per cent in 1980. In the first quarter of 1981 the value of the Turkish lira vis-à-vis the U.S. dollar was adjusted three times, resulting in a cumulative depreciation of 6.7 per cent. Viet Nam, whose currency is pegged to the SDR, devalued the dong by 13.2 per cent in November 1980. Yugoslavia, which until February 1981 maintained a fluctuating exchange rate, depreciated the dinar by 23.1 per cent on June 7, 1980; in 1980 as a whole, the middle rate of the dinar vis-à-vis the U.S. dollar depreciated by 34.6 per cent. Within the context of stabilization programs supported by the Fund, Zaïre devalued the zaïre against the SDR by 30 per cent in February 1980 and by 40 per cent in June 1981.
India, which maintains the value of its currency within 5 per cent of a weighted basket of currencies of its major trading partners, frequently changed the exchange rate of the rupee against its intervention currency, the pound sterling, for a cumulative depreciation of 5.6 per cent during 1980. Countries which frequently changed the exchange rate of their currency without following strictly an explicit set of indicators and their cumulative rates of change in 1980 against their intervention currency, the U.S. dollar, were Iceland (a depreciation of 36.7 per cent), Korea (a depreciation of 26.7 per cent), and New Zealand (an appreciation of 2.5 per cent). In addition, Brazil, Colombia, Portugal, and, since August 1980, Peru adjusted their exchange rates frequently by small amounts on the basis of a set of indicators. The cumulative rates of devaluation against the U.S. dollar of the currencies of the aforementioned countries during 1980 were 35.1 per cent, 13.6 per cent, 6.1 per cent, and 26.8 per cent, respectively. In the case of Peru, this total includes pre-announced end-of-month exchange rates until July 1980, when Peru ceased to preannounce its exchange rate three months in advance. Chile, which had abandoned in mid-1979 the advance announcement of its exchange rate in favor of a fixed rate of the peso vis-à-vis the U.S. dollar until February 1980, announced in January 1980 that the fixed rate would be maintained indefinitely.
A few modifications were adopted by the countries relying on advance announcement of their exchange rates. Argentina ceased at the start of 1980 to adjust the exchange rate of the peso in accordance with preannounced schedules of daily buying rates. Instead, the peso was to be devalued by 2.8 per cent in January 1980, to be followed by adjustments that would be 0.2 percentage points smaller each month, a procedure which would have resulted in exchange rate stability after March 1981. In September 1980, however, Argentina decided, in light of a strong real appreciation of the peso, to avoid any further deceleration of the monthly rate of devaluation by applying the rate of devaluation of 1 per cent originally scheduled for October also to November and the following months. In December this arrangement was confirmed for the spot buying rate, while the spot selling rate was to be increased by 2 per cent each month during the first three months of 1981. The Central Bank would sell foreign exchange if the announced selling rate is reached, and it would buy or sell foreign exchange if the announced buying rate or selling rate, respectively, is reached. In February 1981 the peso was devalued by 9.1 per cent vis-à-vis the U.S. dollar, and the spot selling and buying regulation rates were adjusted accordingly. At the same time, Argentina reverted to announcing daily rates by publishing a schedule of regulation rates through the end of August 1981. According to the schedule, the selling rate increases by 3 per cent a month during the period and the buying rate rises by 2 per cent a month during February-March 1981 and by 3 per cent a month for the remainder of the period. Following a two-day closure of the exchange market, the spot buying and selling rates of the peso were depreciated by 24.5 per cent and 23.2 per cent, respectively, on April 2, 1981; moreover, it was announced that the exchange rate of the peso would be adjusted by small amounts at frequent intervals and that the Central Bank would determine the spot buying and selling regulation rates for the U.S. dollar. On June 2, 1981 the spot buying and selling rates of the peso were depreciated by about 23 per cent, and it was announced that the Argentine peso would be further depreciated by about 6 per cent in the course of June. Brazil, which is classified as adjusting its currency according to a set of indicators, announced devaluation targets for 1980 as a whole and for the period July 1980-June 1981. In November 1980, however, the Brazilian authorities announced that they would discontinue, from the beginning of 1981, the practice of announcing devaluation targets. Portugal, also classified as adjusting its currency according to a set of indicators, lowered the preannounced monthly rate of depreciation of the escudo in effective terms from 0.75 per cent to 0.5 per cent in July 1980. Uruguay announced in May 1980 that the new peso would be depreciated by 15 per cent in the course of 1980. At the end of 1980 the target rate of depreciation during the first five months of 1981 was set at 6.48 per cent. In the meantime, in September 1980, a new schedule of daily buying and selling rates for January and February 1981 had been published, which implied a 2.8 per cent devaluation against the U.S. dollar for that period. In the first quarter of 1981, monthly schedules until the end of September 1981 were published, indicating a cumulative depreciation of the new peso against the U.S. dollar of 11.4 per cent during the first nine months of 1981.
Revaluations, which occurred less frequently than devaluations, involved generally small adjustments in the external value of the currencies concerned. Botswana revalued the pula by about 5.3 per cent against its currency basket in November 1980. In March 1980 Finland revalued the markka by 2 per cent within the posted fluctuation limits, to reflect the average change in the exchange rate of the currencies most important for Finland’s foreign trade. Also in March 1980, a revision of Malta’s currency basket resulted in a minor appreciation of the Malta pound both against the U.S. dollar and in effective terms. In early April the continued strength of the U.S. dollar triggered a new adjustment in the basket formula which resulted in a 4.3 per cent appreciation of the Malta pound against the U.S. dollar. As the maintenance of the new basket would have resulted in a further appreciation of 6 per cent by late April, the Maltese authorities reverted to the basket introduced in March 1980, which limited the additional appreciation against the U.S. dollar to 1.5 per cent. In March 1981, following the devaluation of the Italian lira, that currency was removed from the basket, and its weight was allotted to the U.S. dollar and the Japanese yen. This adjustment resulted in a 0.5 per cent appreciation of the Malta pound vis-à-vis the currencies in the basket. While continuing its policy of depreciating the escudo by small amounts each month against a basket of currencies, Portugal revalued the escudo by 6 per cent in effective terms in February 1980. In the same month Nepal, which maintains a dual market for the U.S. dollar, raised its second official exchange rate by 14.3 per cent against the U.S. dollar while simultaneously reducing the coverage of transactions through the basic market. In August Nepal appreciated the buying rate for banknotes by 2.6 per cent in the case of the U.S. dollar and by 1 per cent in the case of other major currencies. In the course of 1980 and early 1981, the currencies of Qatar, Saudi Arabia, and the United Arab Emirates were adjusted upward in terms of the U.S. dollar, the intervention currency. Although pegged to the SDR, the three countries maintain margins not exceeding 7.25 per cent around their pegs. As part of a package of measures to combat inflation, Seychelles revalued its exchange rate in terms of the SDR by 15 per cent in March 1981.
Four members adjusted the currency baskets on which their exchange rates are based. Cape Verde reduced the number of currencies composing its basket from 11 to 9 in January 1980. As mentioned previously, in March 1980 Malta initially revised its basket in order to take into account the flow of trade in 1979 as well as the past and prospective cost of oil imports. The subsequent changes, including the removal of the Italian lira in March 1981, were aimed at steering a middle course between strong and weak currencies. When devaluing the Solomon Islands dollar in March 1981, the Solomon Islands changed the weights of the 4 currencies in the basket to which the Solomon Islands dollar is pegged, to reflect settlement rather than trade patterns. In accordance with recent practice, Sweden updated in April 1980 the weights of its currency basket to take account of average shares on the basis of trade statistics for the last five calendar years.
Two countries which do not maintain the exchange rate of their currency within announced margins notified the Fund that they were using currency baskets to guide them in the setting of exchange rates. In February 1981 Iceland began to let the rate of the króna follow the trade and payments-weighted average of exchange rates. The Icelandic authorities consider this temporary practice, which was adopted mainly because of the unsettled exchange rate situation in early 1981, as one of several guidelines for the conduct of exchange rate policy. Also in February 1981, Yugoslavia permitted the exchange rate of the dinar to fluctuate within margins of 8 per cent around a basket of 11 currencies representing the relative importance of those currencies in Yugoslavia’s total payments. Within the band, the exchange rate of the dinar is determined in accordance with certain indicators, such as relative producer prices and Yugoslavia’s current account position.
Two countries, whose currencies are pegged to country-specific currency baskets, adjusted the margins around the peg. Bangladesh raised the margins for fluctuations of the effective exchange rate of the taka in January 1980 from plus or minus 2.5 per cent to plus or minus 3.5 per cent. However, together with the devaluation of the taka in terms of the pound sterling in October 1980, the margins were reduced to plus or minus 1 per cent. In January 1980 Finland reduced the upper and lower fluctuation limits of its currency index from 121 and 114 to 119 and 112, respectively. The previously mentioned revaluation of the markka in March 1980 was effected within the new fluctuation limits.
There was only one change in intervention currency notified during the review period when Papua New Guinea replaced the Australian dollar with the U.S. dollar for this purpose in April 1980.
New currencies were introduced by four members. In March 1981 Equatorial Guinea replaced the ekuele by a new currency, the epkwele, at the rate of one to one. At the start of 1981 Iceland issued a new monetary unit. Although the official name, the króna, was retained for the new unit, its value is one hundred times that of the old one. The new króna is divided into 100 aurar. Old notes and coins were to remain legal tender until mid-1981, but the Central Bank was prepared to exchange new currency for old until the end of 1982. In February 1980 Israel introduced a new national currency, the shekel, equivalent to ten times the Israel pound, which it is to replace after a transitional period during which both currencies will circulate with each other. Finally, Lesotho began issuing a national currency, the maloti, in January 1980. The maloti is pegged at par to the South African rand, which continues to be legal tender.